Limitations on the mortgage interest deduction

Limitations on the mortgage interest deduction

May 10

A house is a major part of everyone’s future plans. Every single person at some point of time want to buy a house of their own and have certain ideas about how it would be, but with the increasing financial difficult times everything has become much more expensive than what they used to be. Hence, it makes  buying every single thing including a house a lot more difficult.

Mortgages and their increasing popularity

But when there is a problem there is a solution as well, in this case mortgages have become an all time favorite. Almost everyone now-a-days opts for these loans in order to get a house of their dreams. When talking of any loan the real deal of concern is its interest rates. In mortgage loans the interest rates are deductible in two ways and are restricted to your present or primary home and the qualifying second home. One way happens to be acquisition liability and the other is home equity liability. Many a times those who fail to understand the full expanse of these terms, have suffered the consequences of it too and found themselves in trouble of internal revenue service penalties. If you fully want to understand the deductions then you have to understand these terms.

Acquisition ineptness can be described as the amount of debt that one incurs as soon as one gets the loan to purchase the house minus the amount he or she has already paid as the principal amount. The only way that your acquisition ineptness can increase is when you happen to already have finished or if you are about to finish the home enhancements. If you did the enhancements within the late two years then you may still be able to refinance and can count that amount in your acquisition ineptness.


Refinancing or taking a second loan

Home equity liability on the other hand is very easy to understand. It can be described as the amount by which your mortgage exceeds your acquisition liability. Currently home equity liability is proscribed to $100,000 and acquisition ineptness is proscribed to $1 million.

The real problem arises if you have refinanced an amount that is more $100,000 then you can deduct the interest on amount over $100,000. This is because of the house indebtedness limitation. So those who think they can take the amount of their original mortgage by $100,000 are wrong.

You will be able to understand it better with the help of an example:

Suppose you buy a house worth $250,000 with the assistance of a mortgage of $200,000. Also you were in California therefore your house is estimated as $500,000 and you have very sincerely paid your mortgage down to $100,000. No you are in a situation where you need cash and hence you decide to do cash out refinance. You hence plan to choose a refinance option of a brand new mortgage of $300,000. So now you are wondering how much will actually be deductible?

Well in the above example your acquisition liability and home equity liability both are $100,000 therefore you can only deduct this amount from the primary loan amount of $200,000, the remaining $100,000 is deemed non-deductible.

Now let’s add another example to this same hypothetical situation. Suppose you decided to reconstruct your house a few years back and hence spend $50,000 to make a pool which took two years to be completed and you paid for it entirely then you can just add this $50,000 the acquisition liability and then effectively deduct this entire amount of $250,000 from the $300,000 amount of the second mortgage.

There are other ways as well to exceed these limitations. However you should know raise against the Alternative Minimum Tax limitations you will not be able to deduct your mortgage interest anyway.

With all the limitations on the interest rate deductions on the mortgages, one would always thing that it’s difficult to bear the loans. However, given the benefits associated with these loans one has to take the loans to fulfill their dreams. Interest rate regimes follow a definitive cycle and hence wait and see if they are the best.